Russia becomes Iraq Kurds' top funder, quiet about independence vote

Russia, the only major power that has not called on Iraq's Kurds to cancel a referendum on independence next week, has swiftly become the top funder of Kurdish oil and gas deals, with as much as $4 billion pledged in less than a year, industry sources say.

Washington, European countries, Turkey and Iran have all lined up to oppose a move by Iraq's Kurds to hold a Sept. 25 independence referendum, which the Kurds consider the culmination of decades of struggle for a state of their own, but Iraq calls a violation of its constitution.

This week, the White House issued a statement calling the planned vote "provocative and destabilizing", noting that it will take place not only within the autonomous Kurdish region itself but on territory that is disputed.

But Moscow has issued no such call to cancel the vote.

Instead, with the planned referendum just days away, Russian state oil giant Rosneft announced its latest investment last week, to help Iraqi Kurdistan develop its natural gas industry, for domestic supplies and eventual export.

The full value of the deal has not been disclosed officially, but according to industry sources familiar with it, it is worth more than $1 billion.

It is Rosneft's third giant venture in the Kurdish region since February, transforming Moscow from an outsider with little profile in Kurdistan into the region's biggest source of cash.

According to the industry sources, Rosneft's deals since it first arrived in Kurdistan last December are worth around $4 billion in total. That exceeds the $2 billion in financing the Kurdish region has previously received for oil sales from international trading firms that pre-pay for its exports, and $1.5 billion it has received from neighbor Turkey.

It also marks a big change in focus for the Iraqi Kurds, who have had close ties with Washington since 1991 when the United States offered them protection from Saddam Hussein, the dictator later toppled by U.S. forces in 2003.

"Moscow has been effectively filling the gap as the United States has been pulling back from Iraq," said a senior source in Erbil, capital of the Iraqi Kurdish region.

Publicly, Moscow says it supports Iraq's territorial integrity while also recognizing the aspirations of the Kurds for a homeland. The 35 million Kurds are spread over Iraq, Iran, Turkey and Syria.

"We are interested that the Kurdish people like any other nation on the planet can fulfill its hopes and aspirations," Foreign Minister Sergei Lavrov said in July. "We start from the fact that the legitimate aspirations of the Kurds, like other peoples, need to be fulfilled within the framework of existing international legal norms."

But unlike other powers, Moscow has avoided giving a verdict on the legality or wisdom of holding the referendum itself. The Foreign Ministry in Moscow said it had nothing to add to Lavrov's comments on the matter from July.

"The Russian position is: 'Let’s wait and see the outcome of the referendum,'" said Hoshiyar Zebari, one of Iraq's pre-eminent Kurdish politicians, who served as foreign minister, deputy prime minister and finance minister in Baghdad from 2003 until last year and now advises Kurdistan's regional government.

"They seem to understand our situation," Zebari told Reuters, adding that Moscow expected the Kurds would use the outcome of the referendum as part of a process of negotiation with Baghdad.

According to a diplomatic source, the Kurds took notice in June when Lavrov signaled to a Kurdish delegation at a meeting in St Petersburg that Russia would not oppose the referendum.

"During previous meetings, Lavrov always focused on Iraq's territorial integrity," said the source, who was present at the meeting on the sidelines of Russia's economic forum in St Petersburg.

"This time, he said that Russia understands the ambitions of Kurdish people for independence. And even though he added that it needed to be done carefully, it was a big signal."

At around the same time as that meeting took place, Rosneft was signing its second of this year's three major oil investment deals with Kurdish officials. Days later, the Kurds announced the date of their referendum.

LOOKING FOR FRIENDS

The Russians are not the first foreigners to come to Kurdistan looking for oil.

The Kurds have long argued that as an autonomous region of Iraq they have the authority to make agreements with foreign companies about pumping the oil on their territory. Iraq's central government, meanwhile, says any deals to export oil from Kurdistan are illegal without Baghdad's blessing.

For several years, American companies were at the forefront of negotiating deals with the Kurds, on the assumption that Baghdad would eventually authorize them. The highest-profile deal was announced by Exxon Mobil, then under the leadership of CEO Rex Tillerson, now U.S. Secretary of State.

But after signing a landmark deal to develop Kurdish oil fields in 2011, Exxon did little exploration, and has since handed some of the blocs back to the Kurdish government.

While Washington remains friendly with the Kurds and sees them as a bulwark against Islamic State, it is concerned about their independence bid leading to the breakup of Iraq or a rupture with Turkey. The United States has long encouraged the Kurds to avoid unilateral steps, such as the referendum, that might destabilize the Baghdad government or antagonize Ankara.

Russia, meanwhile, is looking for more friends in the Middle East after returning in force to the region with a decisive military intervention in Syria. Its main regional allies are Iran and the Syria of President Bashar al-Assad, and having friends in Kurdish territory, located between Syria, Iran and Turkey, would be geopolitically useful.

DEAL AFTER DEAL

Kurdistan has estimated recoverable reserves at 45 billion barrels of oil and 5.66 trillion cubic meters of gas, which could rise further with exploration.

For Rosneft, run by Igor Sechin, a close ally of President Vladimir Putin, it potentially offers a cheap source of crude supplies to refineries in Europe, and a big boost to Rosneft's gas ambitions.

In 2014, Erbil started oil sales via a pipeline through Turkey. It has generally conducted those deals with pre-financing, obtaining money in advance from international trading firms and Turkey before the oil is delivered.

Rosneft began its involvement with a small pre-finance deal at the end of last year along the lines of deals the Kurds had previously reached with global traders. The Russian firm loaned the Kurds around $280 million, guaranteed by future oil sales, according to industry sources.

In February 2017, Rosneft ramped up its cooperation by agreeing to lend the semi-autonomous region $1.2 billion, becoming the first big foreign oil company to publicly commit to pre-financing Kurdish exports.

Kurdistan's minister of natural resources Ashti Hawrami called the deal a ground-breaker for the region that would help its economic independence - a crucial condition for seeking political independence.

By that point, Turkey had invested some $1.5 billion and international trading houses such as Vitol, Petraco, Trafigura and Glencore had collectively loaned the Kurds some $2 billion.

Russia became the Kurds' single biggest financer with its next deal in June this year to lend money and help search for more oil, bringing its total investments close to $2.8 billion.

This week's Russian pledge to invest more than $1 billion in Kurdistan's gas infrastructure could help the region become a major gas exporter to Turkey and Europe one day, Rosneft says. The independence referendum won't be a problem.

"Holding the referendum will not affect our work. We are doing business in an autonomous region in Iraq that has been recognized by law," Rosneft spokesman Mikhail Leontev said this week. "This place is run by Iraqi Kurdistan’s nation and it is the people of Iraqi Kurdistan who live there. That is why we don’t think we are embarking on an adventure."